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Beginners' Guide to Financial Statements

Amitava Basu

MANY consider understanding financial statements is a difficult task. But, understanding these statements is not rocket science. If you can read a nutrition label or if you can follow a recipe, you can learn how to read financial statements.

Financial Statements
What do financial statements mean? Like the immortal line of Cuba Gooding Junior's movie 'Jerry Maguire' show me the money the financial statements basically show where a company's money came from, where it went, and where it is now. There are three main financial statements-

i) Balance sheet;
ii) Income statement; and
iii) Cash Flow Statement

Balance Sheet
Balance Sheet shows what a company owns, i.e. assets; and what it owes, i.e. liabilities at a fixed point of time. The difference between the assets and the liabilities represents the fund that belongs to the shareholders or the owners of the company; and it is called shareholders' equity or capital or net worth.

Income Statement
Income Statement shows how much revenue a company earned over a specific period of time, usually for a year. Income Statement also shows the costs and expenses associated with earning the revenue. The difference between the revenue and the expenses represent how much a company earned or lost during the period; and is called net profit or net loss.

Cash Flow Statement
Cash Flow Statement reports inflows and outflows of cash. While the Income Statement tells whether a company made a profit or a loss, Cash Flow Statement tells whether a company generated cash. It is important to understand that a company may make loss and lose cash or even make profit by selling on credit and not realise sufficient cash, which is needed to be in hand to pay expenses and liabilities and purchase assets. Thus, Cash Flow Statement shows changes over time rather than absolute taka amounts at a point in time.

Inter-Relationship of Statements
It needs to be clarified that the financial statements are inter-related. The changes in assets and liabilities in the Balance Sheet are also reflected in the revenues and expenses in the Income Statement; and the Cash Flow Statement provides more information about cash and assets easily convertible into cash listed in the Balance Sheet, but not equivalent to net income shown in the Income Statement. No one financial statement can present the complete picture of a company. The financial statements together provide the real information about a company.

Conclusion
There is no reason to be paranoid about financial statement. Read and study these statements without unfounded fear; and over a period of time, you will master the subject. So, ready, steady, go.

Quotes

A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life.
--Suze Orman

A person's credit report is one of the most important tools consumers can use to maintain their financial security and credit rating, but for so long many did not know how to obtain one, or what to do with the information it provided.
--Ruben Hinojosa
A profound political question is suddenly on the table: Must the country continue to give precedence to private financial gain and market determinism over human lives and broad public values?
--William Greider

A second reason why science cannot replace judgement is the behavior of financial markets.

--Martin Feldstein